competing in the china truck market
TRANSCRIPT
Competing in the China Truck Market
Bill Russo Edward Tse
Gao Feng Advisory Company
Competing in the China Truck Market
Driven by strong economic growth and
infrastructure investment, the China auto
industry has enjoyed explosive expansion
in the past decade, at a compound
annual growth rate of nearly 25% over
the period through 2011. However, the
year-over-year growth rate slowed down
to 2.5% in 2011 and 4.3% in 2012 due to
a combination of policy and economic
factors, such as the termination of the tax
incentive policy, the credit crunch,
purchase restrictions in China’s largest
cities, supply-chain disruptions and the
global debt crisis.
2
Exhibit 1
Overall China Auto Industry by Segment
This market slow-down was followed by
14% growth in 2013, with overall sales
approaching 22 million units. Despite this
recovery, the slowdown is evident once
again in 2014 sales, especially in the
commercial sector. Few analysts doubt
that China’s automotive sector has
arrived at an inflection point where future
sales will expand at a more stable and
moderate growth rate.
Gao Feng Advisory Company
3
Commercial vehicles in China consist of
trucks and buses, which have been
negatively impacted by the economic
slow-down. Over the past decade, the
truck sector has grown to meet the
demands from China’s expanding
economy. Historically, the sales of MDT
and HDT1) accounts for 30% to 35% of
the truck sector, which tripled in size from
409,000 units in 2001 to 1,287,000 units
in 2010. As is apparent from Exhibit 2,
this growth momentum has not been
linear. Instead, several waves of
fluctuations have occurred caused by
macroeconomics and policy changes
which directly impact the amount of
capital available to businesses that
Exhibit 2
Historical Sales of Commercial Trucks in China
Competing in the China Truck Market
1) According to China national standard, truck is classified into four segments in terms of gross vehicle weight (GVW). Heavy Duty Truck (HDT) is >14 metric tons, Medium Duty Truck (MDT) is above 6 tons and less than 14 tons (incl. 14T); Light Duty Truck (LDT) is above 1.8 tons and less than 6 tons (incl. 6T), while Mini Truck is less than 1.8 tons.
typically invest in commercial trucks.
Government policies, which directly
determine the levels of investment in
infrastructure, along with measures to
introduce stricter emission standards,
have resulted in big fluctuations in the
market.
In particular, the large stimulus package
launched in 2009 sharply accelerated
demand. “Cash-for-clunkers” schemes
introduced in 2010 helped drive
replacement demand as well as improve
the quality of the overall vehicle parc.
When nearly all government stimulus
measures expired in 2011, the truck
segment entered a downward cycle and
went down to 929,000 units sold in 2012.
Gao Feng Advisory Company
4 Competing in the China Truck Market
Contrary to the US and Europe, where
most sales are replacement sales, in
China MDT & HDT are predominately
new sales which increase the size of the
fleet. Though the parc of HDT and MDT
reached 3.9 million units by 2010, there is
still a large gap relative to the developed
markets in terms of per capita vehicle
ownership. Moreover, several
fundamental drivers will prevail in next
few years to push forward the demand for
MDT & HDT.
First, industrialization and urbanization
in China drives higher fixed-asset
investment. Fixed asset investment of
China (adjusted by Purchase Power
Parity) is 1.3-1.6 times higher than that of
Western Europe and the U.S. Such huge
investment is mostly spent on the railway,
highway and other infrastructure projects,
which in turn drives demand for more
commercial (mainly heavy duty) trucks.
Meanwhile, China’s current urbanization
rate is about 50%, ant this will increase to
over 60% by 2020. Clearly, these trends
will continue to fuel higher demand for
commercial vehicles for the foreseeable
future.
Second, cargo transportation demand
of China is larger than that of the U.S
with a higher growth rate. High cargo
transportation demand is a result of
inefficient logistics, urbanization and the
size of country. All of these factors will
push higher demand for Long-Haul HDT.
Third, the replacement cycle of
HDT/MDT in China is much shorter
than that of the developed markets.
This will create significantly more
replacement buying in China than
international makets.
In China, line-haul HDT can typically only
be used for 0.9 to 1.1 million Km while in
the US, the number is as high as 1.5 to
1.7 million Km. As a result of such
differences, the average age of MDT/HDT
in China is only 6 years, much lower than
11.3 years in US.
Taking a broader look at the global
context, several macroeconomic and
sociopolitical developments are altering
balance of power in the automotive
industry. These include the recent
financial crises, which have effectively
resulted in a redistribution of global
economic power, altered the global trade
balance, and renewed concerns over
energy security and environmental
issues. The growing size and influence
of the Asian economies – especially
China – are triggering a transformation of
the automotive business model, with
automotive enterprises seeking to
leverage the momentum of the region.
The recent shift underscores the
importance of the Asian economies to the
future growth and profitability of the
global auto industry.
Most of the recent growth in the world’s
auto industry has been in the Asia-Pacific
region, and more than half of that growth
over the next decade is forecasted to
come from China. Similar regional
demand migration also applies to the
MDT/HDT sector.
Driven by continuous industrialization,
urbanization and cargo transportation
demand, China’s MDT/HDT market is
anticipated to come through the current
down-cycle and experience a strong
rebound thru 2015.
Gao Feng Advisory Company
5 Competing in the China Truck Market
Going forward, several overarching
market trends will shape the MDT & HDT
demand structure:
1. Line-haul HDT demand will be even
larger than vocational trucks in
China resulting from the comparably
lower professional level and lower
operational efficiency of the logistics
infrastructure. This creates
opportunities for international entrants
who have a strong on-road tractor
line-up.
2. A push to meet stricter fuel
economy and emissions standards
will drive a need for advanced
technology and accelerate the truck
manufacturers’ emphasis on
technology upgrades and alternative
fuel application.
3. The source of OEM’s profitability
will increasingly shift from new
truck sales to after-sales services,
including vehicle logistics, value-
added services, parts sales, and auto
finance, etc.
All of the trends noted here will raise the
level of interest among China’s local truck
manufacturers to form alliances with
international truck manufacturers.
The growing influence that China wields
is not simply derived from the size and
scale of its domestic market, which is an
increasingly important focus in a growth-
challenged industry. Increasingly,
financially weakened automotive
companies and their suppliers must strive
to deepen their participation in the China
market if they hope to remain viable.
It only stands to reason that companies
that have weakened positions in their
domestic market would benefit by
redistributing some of their focus to the
growth markets and in particular China.
In summary, China’s HDT/MDT market is
expected to come through the short
macroeconomic cycle into a sustainable
growth track from now through
2020, and global truck makers should
position themselves to participate in the
market by forming alliances to leverage
their unique capabilities in the areas of
product, technology and after-sales
services.
Gao Feng Advisory Company
6
Corp (CNHTC) in the top 3 positions for
HDT. Together they have a combined
market share of 55% of the MDT/HDT
market, as indicated in Exhibit 3.
However, each OEM has distinctive
positioning and advantages in the HDT
segment.
FAW and DFM enjoy the best brand
image and have a deep commercial
vehicle experience, along with a well-
developed dealer and service network.
However, both suffer from weak
corporate governance and a lack of
employee performance incentives.
Both companies have developed their
HDT product line-up through upgrades
from their MDT platforms, and they
positioned themselves as volume
leaders in the medium- to low-priced
HDT segment
Exhibit 3
Market Share and Sales of Chinese Commercial Truck Makers
Competing in the China Truck Market
Competitive landscape
Unlike the passenger vehicles market,
domestic brand manufacturers dominate
the commercial truck sector in China.
Historically, the top China truck
manufacturers started their MDT & HDT
development from older generation
platforms, which originated from the
former Soviet Union and Austria (Steyr).
The availability of low cost platforms, and
very low freight rates (which have
remained firm for the past two decades),
has created a hidden cost barrier for
major international players.
Full-year sales in 2013 indicates that a
75% market share of MDT/HDT was
taken by 5 Chinese OEMs, with First Auto
Works (FAW), Dongfeng Motors (DFM)
and China National Heavy Duty Truck
Gao Feng Advisory Company
7
Shaanqi benefited from previous
cooperation with MAN and their
technology assistance. However, such
advantages are eroded by the MAN
alliance with CNHTC. Shaanqi is also
fighting with their parent company
(Weichai) for operational control.
Among the smaller truck makers, JAC
and Beiben are most likely to close the
gap with Shaanqi, since they can
leverage the advanced technology
supply from their international partners
respectively. JAC has been discussing
potential partnerships with Navistar
and Caterpillar, while Beiben is
cooperating with Hyundai.
The rest and other new entrants, such
as SAIC, CAMC and Nanjun, have a
much narrower range and face several
technical and financial constraints to
expand their market share.
Competing in the China Truck Market
CNHTC is considered the best
competitor in the construction sector.
They develop their own parts and will
benefit from the JV with MAN in the
area of product and component
development, procurement and sales.
CNHTC is weak in their portfolio of
long-haul vehicles. Their company
operation is considered very
bureaucratic and they have a poorly-
developed dealer and service network.
BAIC Foton is behind the top 3 in
sales, and should considerably benefit
from the JV with Daimler to develop
engines. Despite their smaller scale,
Foton has more efficient product
development, stronger marketing and a
better dealer network.
Shaanqi has comparable sales to
BAIC Foton, and is well recognized in
the vocational HDT sector. Historically,
Exhibit 4
Market Share and Sales of Chinese Commercial Truck Makers
Gao Feng Advisory Company
8
China MDT/HDT manufacturers benefit
from low labor and raw material costs,
which enable them to sell their Vehicles
at 25 – 33% of the price of international
products. As shown in Exhibit 4, prices
for trucks produced by multinationals can
range as high as USD $350,000 (MAN),
whereas the highest priced product in
China sells for 72% less at USD
$100,000 (FAW).
However, Chinese truck makers are
increasingly confronted with a different
set of challenges:
On the demand side, the government
and commercial fleet demand is slowing
down, and buyers are increasingly
concerned with fuel economy and
durability. Further complicating the
landscape is the fact that more stringent
regulations regarding safety and
environmental standards are being
implemented – driving cost structure
higher.
Exhibit 5
Potential Ventures Between Foreign and Chinese Truck Makers
On the supply side, the technology and
feature gap among local manufacturers is
narrowing. It is becoming increasingly
difficult to charge any price premium on
new vehicles as the market has become
hyper-competitive and less differentiated.
Those challenges are pushing local
brands to alter their thinking regarding the
need for development and technology
support from international partners.
With the gates to China’s commercial
truck market potentially beginning to
open, leading HDT manufacturers have
begun to explore joint ventures and
alliances in China with top-tier
manufacturers. Various joint venture and
equity shareholding relationships were
established since the SAIC Iveco
successfully formed its JV with
Chongqing Hongyan in 2006 (see Exhibit
5).
Competing in the China Truck Market
Gao Feng Advisory Company
The cooperation between MAN/CNHTC
offers perhaps the most promising
cooperation, as the interests of both
parties are apparently well aligned. The
strategy includes formation of an R&D
center and involves a global strategy
including direct exports to the EU.
The Daimler/BAIC-Foton JV entails a
strong technology component and a solid
market component. The Iveco/SAIC
cooperation has been in place for several
years and provides a limited rage of
products for the domestic market.
Navistar/JAC have more recently
discussed a potential cooperation for the
China domestic market, and Volvo Truck
is partnering with Dongfeng Motor to form
a HDT joint venture after ending their
cooperation with CNHTC. This JV is to
be majority (55%) controlled by
9
Exhibit 6
Price Comparison of Foreign vs. Domestic OEMs
Dongfeng, and may involve building a
locally-branded HDT based off a
European standard cab and chassis
supplied by Volvo.
Expanded cooperation between domestic
manufacturers and international players
will reshape the landscape of China’s
HDT market. As depicted in Exhibit 6,
the market can be broken down into three
price segments: Low-end (less than
200,000 RMB, e.g. 32,000 USD), Mid-
market (200,000-350,000 RMB, e.g.
32,000-55,000 USD) and High-
end/imported segment (above 350,000
RMB). Among which, the mid-market
segment is more than 70%, and being
continually enlarged by virtue of the
continuous upgrading of locally built
trucks.
Competing in the China Truck Market
Gao Feng Advisory Company
10 Competing in the China Truck Market
The mid-market HDT segment is different
from the low-end product segment, not
only by pricing, but also by vehicle
capacity and sophistication of
technologies. Mid-market HDT is
characterized as higher gross weight (18
tons and above), higher power output
(range from 230HP-420HP), and more
advanced safety and fuel economy
technologies.
Two paths are followed by Chinese truck
manufacturers for obtaining such
technologies. Independent development
on the inherited vehicle platform is one
approach. The Jiefang brand J6
developed by FAW is one good example.
However, J6 was a cost- and time-
intensive project for FAW, which spent a
total of seven years and invested more
than USD $100 million. As an alternative,
China local manufacturers are choosing
to collaborate with international partners
to locally adapt their existing global
platforms to the Chinese market
requirements. Starting with the initial
cooperation between MAN and Shannaqi
on the F2000 platform in 2004, other
collaborative partnerships have followed.
Dongfeng worked with Nissan Diesel on
development of the Tianlong series,
CNHTC developed its Howo A7 based off
the F10 cab from Volvo, and BAIC Foton
is planning to use a Mercedes-Benz
diesel engine to power their Auman
trucks.
These locally adapted international
technologies are widely welcomed by
Chinese customers as “best value”
products since they outperform low-end
trucks while retaining a huge price
advantage over the high-end/imported
trucks. Obviously strong demand for mid-
market products is motivating Chinese
truck manufacturers to turn to
international partners for technology and
shared investment.
With the market slow-down since 2011,
many truck manufacturers are becoming
concerned that they may have been
overly aggressive regarding their growth
prospects. Overcapacity in China will be
an issue for the years to come. The
forecasted demand for HDT in 2015
stands at 1.5 million units, whereas
capacity will likely exceed 2 million units.
Existing OEMs have ambitious expansion
plans, and new entrants are also
considering expanding their business into
the HD truck market. To overcome the
overcapacity problem, leading Chinese
truck manufacturers are considering
aggressive export strategies, particularly
to Africa, South America and South East
Asia and other countries with low
emission standards, low tariffs and weak
domestic truck competition.
What gives Chinese OEMs the
confidence to expand the truck export
business is their low-price, “good enough”
quality Chinese supply base. Competitive
parts sourcing cost in China has the
potential to change the global competitive
landscape for commercial vehicles 2).
Already today, China accounts for 50% of
the global MDT/HDT market, with
localized suppliers.
2) China with its unique business environment (enormous size, fiercely competitive companies, low labor costs, and explosive growth in infrastructure and public service), gives this new global mid-market players an enormous platform to grow and to improve their quality and reliability, largely protected from foreign competitors, who find it hard to penetrate this segment and focus on the high-end market. In addition the new innovators will be fully attuned to the Chinese needs, particularly in the B2B area, which will make them very competitive in other emerging markets.
Gao Feng Advisory Company
In summary, the China MDT/HDT market
is almost fully dominated by domestic
truck manufacturers led by FAW, DFM
and CNHTC. The competitive landscape
will be altered when Chinese OEMs
pursue partnerships designed to upgrade
their capabilities to address growing
market needs for better value HDT
products.
11
Exhibit 7
Top Vehicles Manufacturers in China
Competing in the China Truck Market
promulgated in the early of 2009,
“capable Chinese players are encouraged
to grow stronger by M&A and
restructure”.
The plan outlines an intention to
consolidate the industry into 2 distinct
“tiers”: the Tier 1 group consisting of
companies with an annual capacity of 2
million units that are encouraged to
acquire smaller automotive companies
throughout China, whereas Tier 2
consists of companies with an annual
capacity of 1 million units are encouraged
to drive regional consolidation.
The plan even names 4 tier 1 companies
as well a 4 tier 2 companies:
Policy & regulatory outlook
Government policy plays leading role in
driving the development and eventual
consolidation of China’s auto industry.
According to the Plan on Adjusting and
Revitalizing the Auto Industry
Gao Feng Advisory Company
TIER 1:
– Shanghai Automotive Industrial Corp
(SAIC)
– First Auto Works (FAW) Group
– Dongfeng Motors (DFM)
– Chang’An Automotive
TIER 2
– Beijing Automotive Industrial Corp
(BAIC)
– Guangzhou Automotive Industrial
Group (GAIG)
– Chery Automobile
– China National Heavy Duty Truck
Corp (CNHTC)
As shown in Exhibit 7, the top 3 HDT
manufacturers including FAW, DFM and
CNHTC are among the Tier 1 and 2 OEM
12
Exhibit 8
Acquirers and Acquirees among Top 10 HDT/MDT players
groups named within this consolidation
plan, and are therefore likely to receive
extra funding and policy support from the
central government when acquiring
smaller companies.
Responding to the government policy
indication, leading auto groups are
actively establishing their growth
strategies and seeking to build scale
advantage. Among them FAW, DFM,
BAIC, SAIC, and CNHTC are more likely
to be acquirers in industry consolidation
among the HDT/MDT players (See
Exhibit 8).
The early stages of industry consolidation
have already begun. Starting from its
acquisition of Nanjing Auto Group in
2007, SAIC has expanded their
production bases from Shanghai to
Yizheng and Nanjing in Jiangsu province.
FAW is had approached Brilliance
regarding business restructuring and
acquisition.
Competing in the China Truck Market
Gao Feng Advisory Company
If the deal is done, FAW could grow
larger than SAIC in terms of scale. To
defend themselves and avoid being
acquired, smaller commercial vehicle
companies like JAC, Beiben and others
are actively expanding their business
coverage, developing special sectors,
and establishing product technology
cooperation.
For global truck manufacturers, the
consolidation of the China auto industry
implies that a more structured and
disciplined market will eventually emerge
which will increase the efficiency, scale
and R&D capabilities of the remaining
competitors. Leading Chinese OEMs will
seek to expand their ownership of assets
and capabilities needed to compete in an
increasingly global business.
13
Exhibit 9
Implementation of Truck-related regulations in China
Competing in the China Truck Market
Chinese OEMs must therefore move up
the value chain to deliver products with
competitive technology to address a
growing demand generated for world-
class quality trucks. To achieve this, they
will undoubtedly allocate larger
investments into product development,
enabling better responsiveness to the
market. Further, the industry will require
better IP protection and enforcement to
facilitate technology sharing with
international players.
Exhibit 9 provides a summary of the
truck-based regulations implemented in
recent years in China.
Gao Feng Advisory Company
14 Competing in the China Truck Market
Though industry consolidation will likely
be a central theme in the next decade,
there are several other policy and
regulatory trends that pose challenges to
the global truck manufacturers in China.
First, the China government is closing the
gate for international newcomers by
raising the entry barrier for new
project approval. Automotive industry
policy makers have strong concerns with
overcapacity risks in the China auto
industry. These concerns are having an
impact on their willingness to consider
new vehicle manufacturing projects
including HDT. Therefore, Ministry of
Industry and Information Technology
(MIIT) released the Admission
Management Rule for Commercial
Vehicle Enterprises and Products, which
took effect from January 1st, 2011,
requiring all truck manufacturers to strictly
follow current investment and capacity
utilization requirements. Despite this,
other very challenging policy objectives
must also be met, including the upgrading
of the technology used in the local
brands, new energy vehicle development
and export promotion. Global
manufacturers who are willing to share
critical technology and capabilities with
their Chinese partner may be able to
successfully receive approval for their
new manufacturing project in China.
Second, although Chinese policy makers
stress their serious attention to the
subject, Intellectual Property (IP)
protection is an area of great uncertainty
for global manufacturers. Global vehicle
manufacturers are pushed to transfer
their leading technologies in a market
where the legislation and law
enforcement for IP rights violations is far
from sufficient. Many IP related lawsuits
claimed by international manufacturers in
China have not been met with
satisfactory results, such as BMW’s
compliant for Hubei Shuanghuan’s styling
imitation of X5, Fiat’s claim for Great
Wall’s copy of Panda, as well as GM’s
claim for Chery’s copy of the Chevrolet
Spark. Such issues also extend into
areas of technology and other transfer of
capabilities. Learning from past
experiences, many international
manufacturers have taken both technical
and commercial measures to protect their
IP when cooperating with Chinese
partners. For instance, a modular
sourcing strategy from Tier 1 suppliers
can be employed (instead of sourcing
individual component through the Joint
Venture) has become a common practice
to protect IPR of the multinational partner.
Third, global truck manufacturers will
increasingly face China unique
standards, which are influenced by the
local players. Global truck
manufacturers who have made significant
commitments to the market often feel like
a “guest in their own house” when doing
business in China. For instance, the
delay of Euro 4 gives local MDT/HDT
manufacturers more time to develop their
technology, as they retain their enormous
cost-advantage compared to foreign high-
end OEMs. Similar advantage for Local
MDT/HDT manufacturers is the current
End-of-life regulation, which requires
scrapping after 600,000 km. Such
developments might be influenced by
politics. To mitigate risk of such
unfavorable standard, global truck
manufacturers have to make proactive
Gao Feng Advisory Company
15 Competing in the China Truck Market
efforts in involving and lobbying the
organizations that develop regulations.
The resources and experience of the
Chinese partner in dealing with the policy-
makers are also essential to be leveraged
to address this challenge.
Finally, global truck manufacturers will be
exposed to legal compliance risks when
working with their Chinese joint venture or
affiliated company. In spite of measures
taken to address the problem, bribery and
other corrupt business practices are
common in China. Several years ago,
individuals within the Daimler Truck
division were implicated in an anti-bribery
case in China. Daimler was required to
pay as much as USD $185Mn for
reconciliation, and the company has been
compelled to reinforce corporate
compliance in every process of the
business operation. Corrective actions
such as establishment of a regional
compliance office, compliance-related
business processes, mandatory
compliance training, and a hotline to
report violations of compliance behavior
have turned out to be highly effective in
mitigating the compliance risk for Daimler
in China.
Implications for multi-
national corporations
(MNCs)
China’s market size has been hyped to
the point of cliché since the country first
opened its doors to foreign investment.
By 2020, as noted in Exhibit 10, the
China HD/MD truck market is expected to
reach 1.7 million units sold per year. As
noted previously, products positioned in
the in the price range between 200K –
350K RMB account for 70% of total sales.
The companies positioned to sell to this
rapidly expanding “mid-market” segment
aim to address the needs of domestic
customers looking for goods and services
that offer “good enough” quality and value
for the money.
Sandwiched between the premium
market and the bottom of the pyramid,
lies the rapidly expanding global middle
market (see Exhibit 11) -- a segment of
business and retail customers that is
rapidly gaining buying power, especially
in emerging markets. The middle market
offers more than incremental customers
and profits – it is a key competitive
battleground. The winners here will likely
be the leading companies of tomorrow.
Beneath the veneer of many middle
market strategies ostensibly focused on
incremental growth, the emerging
markets are incubators for a wave of local
companies that are trying to climb up the
product-price pyramid to eventually
emerge as global competitors.
Gao Feng Advisory Company
16
Exhibit 11
China Truck Market Pyramid
Competing in the China Truck Market
Exhibit 10
Global Truck Sales by Region in 2020
Gao Feng Advisory Company
17 Competing in the China Truck Market
Whatever the motivation for pursuing
mid-market strategies with an
increasingly global scope, the elements of
offense and defense have become equal
in importance. In the spirit of the
Innovator’s Dilemma, written and
popularized by Harvard’s Clayton M.
Christenson 3), companies are adopting
the mantra, ‘if I don’t do it to myself,
someone else will do it to me.’ The
dilemma of introducing fit-for-purpose, but
lower priced products in the home
markets of multi-national corporations
has challenged the conventional business
logic of pursuing projects with ever-higher
return on investment. However,
succeeding in the rapidly expanding mid-
market will certainly trump having an
emerging-market competitor do it before
you.
3) Clayton M. Christenson, The Innovator’s Dilemma (Harper Business: 1997)
Mid-market form
The underlying reason for the emergence
of mid-market players in China is the
nature of the country’s economic growth.
For many industries, China’s product
market segmentation has become very
diverse, typically far more than MNCs’
home countries. In many countries, the
market pyramid has a small top wedge, a
modest middle slice and large base. But
in some others, the lower tier is smaller,
the top is growing but still relatively small,
and much of the expansion is coming in a
bulging middle. Whatever its size, this
middle tier is the natural home base for
many of the best Chinese companies.
Here is where they find the opportunities
best aligned with their strengths.
However, of most importance is that while
winning in the mid-market will determine
the fate of many companies within China,
China’s mid-market impact will be felt far
beyond the country’s borders, as some of
the more prescient multinational
companies have started to realize. The
Chinese companies emerging in this
space will gain access to enormous scale
advantages. Any profits they make will be
reinvested, allowing them to move both
up the value chain, and eventually out of
the country to the international markets.
Gao Feng Advisory Company
18 Competing in the China Truck Market
Breeding ground
The importance of China’s mid-market
stems from the fact that this is where
Chinese companies are establishing
themselves. China’s domestic HD/MD
manufacturers already command more
than 90% share of the market for
commercial trucks, and virtually all of the
low-end market. Having locked in this
business, market leaders including
CNHTC, FAW, DFM, BAIC and SAIC are
in the process of acquiring capabilities
that allow them to address the expanding
mid-market. Developing a highly
adaptive and good-enough mid-market
product offering is the pathway for such
companies to win in China as well as
expand beyond China.
They know they cannot enter at the top
end of the market for most goods – in
almost every industry; their products are
not good enough to take on multinationals
head-to-head. They also know that while
the bottom tier is perhaps their most
natural home, such is the rate of China’s
economic growth that this segment –
however big it may be today – can only
shrink, and at a rapid rate, over the next
few years. Companies that want to grow
must therefore address the middle tiers.
This is where their range of advantages
can be brought to bear. Domestic
businesses have – and will continue to
have – privileged access to this tier. Not
only will they be better positioned to offer
strong value propositions, but they will
also be better prepared to overcome the
structural impediments that will prevent
the rapid adoption of global business
models in sectors such as construction
and agriculture.
The size and diversity of China has
created very complex market
segmentation. Regions are developing at
different rates, with differing amounts of
access to other markets both within the
country and overseas. While this diversity
will not last for ever, the transition stage
the country has already entered will
persist for many years to come – far
longer than in other emerging markets,
such as those of Japan, South Korea and
Taiwan. Here they will be able to temper
themselves and build scale.
The major new companies that emerge
from this breeding ground – some private,
others state-owned – will be some of the
most disruptive forces in Chinese
business. Subject to intense competition
from other mid-market firms, and selling
to customers who themselves are
constrained by competition, these
businesses are both frugal and focused.
From their mid-market bases, the best of
them can build scale, add capabilities,
and start to encroach on turf that
multinationals have long regarded as their
own.
For local players in the emerging
markets, a mid-market strategy can be
quite challenging, since local brands
frequently incur greater pricing risk when
delivering higher contented products into
the market. This is for a couple of
reasons. First, when the local product’s
brand image does not naturally carry the
price points required to support feature-
rich products, these products are at risk
of having to be discounted. Second, local
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19 Competing in the China Truck Market
companies are typically less accustomed
to managing the complexity entailed in
feature rich products, introducing the
risks of cost-creep. Overcoming such
challenges is key to the development of
the next generation of global competitors.
Many Multinationals assume that they
just have to hold on until the Chinese
market is mature enough to afford their
products. But by that time these mid-
market innovators will have built long-
lasting relationships with their Chinese
clients, and will have narrowed the gap
between themselves and their global
competitors. Sany, who became the
world-largest concrete pump
manufacturer and who has recently
acquired the second largest producer
(Germany’s Putzmeister), is an example
of this new breed of global players (see
Exhibit12).
Exhibit 12
Chinese Mid-Market Case Example: Sany
Competing in China’s Mid-
Market
Therefore, most multi-national companies
that aspire to be global leaders have no
choice but to find a way to win in the
Chinese mid-market.
Most common strategies by MNCs are
either to:
1. Ignore the risk and avoid competing in
China’s mid-market altogether.
2. Offer global products and wait until
China catches up to more upscale
demand, which works only for a
limited number of sectors.
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20 Competing in the China Truck Market
3. Pursue a two-tier strategy with a core
brand sold along with a lower-priced
“good enough” brand considered.
MAN is following this approach since
early 2011 and Daimler trucks are
considering it with their partner Foton.
Multinationals simply cannot afford to
cede this mid-market to local competitors.
Instead, they must set about organizing
themselves to face the Chinese
competitors emerging there on their own
terms – with products that
meet Chinese needs, developed at
Chinese cost, and which can then be
taken out of China to other markets
around the world. They must stop
thinking about what it is they can bring to
China, and instead start focusing on what
China’s mid-market can offer them – what
culture and structures they must adopt
that will allow them to innovate at a lower
cost and so produce the goods and
services that will drive the next round of
global growth.
A good example can be found in the
construction equipment industry.
Caterpillar, which in the 1990s focused on
government relationships and selling
traditional, high end products to China,
shifted focus after the entry of Japanese
and Korean competitors in the mid-
market segments, and being squeezed
by lower-end local players. In the late
2000’s, Caterpillar acquired Shandong
Engineering Machinery and formed local
R&D centers to expand into lower end
market, while optimizing its cost base to
compete. Clearly, Caterpillar reasoned,
there was a market segment that was
here to stay and CAT’s traditional product
and business model positioning wasn’t
going to be adequate.
In the medical equipment sector, another
good example of a mid-market innovation
was General Electric’s development of
ultrasound machines. From 1990 to 2000,
GE served the Chinese ultrasound
market with machines developed in the
US and Japan, priced at $100K and
upwards. While these products were
successful with a narrow set of hospitals,
the price point was above the affordability
threshold of many. In 2002, GE’s local
team in China leveraged GE global
resources to develop a cheaper, portable
machine, priced at $30-40K. And then in
2007, GE’s local, China organization
launched a dramatically cheaper model,
priced at only $15K. The result of these
step-wise innovations in somewhat
functionality but at dramatically lower
price points, were products that saw
rapidly increasing sales in China from
$4M in 2002 to $278M in 2008, and at the
same time, these mid-market products
found new markets abroad. As it turned
out, there had been latent demand for
lower-priced ultrasound machines even in
the world’s most developed markets , but
neither GE nor its competitors had
realized this or pursued this demand with
relevant products.
Mid-market products are not simply
lower-cost variants to global, high end
products that can be delivered at lower
price points . Foreign and Chinese
companies will bring very different
mindsets into the battle for the middle
market, as illustrated in Exhibit 13.
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21 Competing in the China Truck Market
Although the competitive strategy to
address the middle markets may be
different, the path for both Chinese and
foreign companies is the same: access
the middle market growth opportunity to
both extend brands and product reach
with the magnitude of impact that can
change the global competitive landscape.
Ultimately, mid-market capabilities rooted
in China can be leveraged to tap global
markets with similar demand patterns, as
illustrated in Exhibit 14.
Exhibit 13
Chinese Mid-Market Case Example: Sany
Quality -- building in quality and reliability precisely in the areas that are most important to customers
Branding -- systematically moving up-market without overpromising and under-delivering
Functionality -- resisting the temptation to layer in unnecessary content in products beyond what middle market customers will pay for
Product ‘plus’ -- recognizing the role that services and solutions play in augmenting the core value of physical products themselves, and building these into business systems
Mind-set and training -- shifting from “just good enough”philosophy to “world class in all that we do”
Functionality
– Take out bells and whistles, while ensuring differentiating features, quality remain
– Adding additional functionality that makes difference for consumers, but can be delivered at low cost due to lower China factor costs (engineering/design, manufacturing)
Business system costs -- reducing unnecessary non-product costs, unrelated to mid-market offering, that have been built into business system over time (complexity driven, corporate overhead, etc.)
Leveraging low cost factor potential in emerging markets, avoiding cost creep driven by mindset from developed markets
Organization -- mid-market products and business models at odds with established corporate practices and bases of power
Typical Challenges
Brand positioning -- move up-market to boost image
Offense -- challenge MNCs at the lower end of MNC product range, and eventually migrate upwards on product/price pyramid
Pursuit of global middle market customers in emerging AND developed markets
Growth -- Tap into larger volume of customers than high end positioning allows
Defense -- innovate in mid-market before MNC/Chinese competitors do
Selectively, leverage China mid-market to sell to other emerging and developed markets
Motivation for Middle
Market Push
Typical starting point
Mid to lower end products
Emerging brands, concentrated in China, often with some sales in other emerging markets
Chinese Companies in China
High end products
Established brands and strong market positions in developed markets world-wide
Foreign Companies In China
Quality -- building in quality and reliability precisely in the areas that are most important to customers
Branding -- systematically moving up-market without overpromising and under-delivering
Functionality -- resisting the temptation to layer in unnecessary content in products beyond what middle market customers will pay for
Product ‘plus’ -- recognizing the role that services and solutions play in augmenting the core value of physical products themselves, and building these into business systems
Mind-set and training -- shifting from “just good enough”philosophy to “world class in all that we do”
Functionality
– Take out bells and whistles, while ensuring differentiating features, quality remain
– Adding additional functionality that makes difference for consumers, but can be delivered at low cost due to lower China factor costs (engineering/design, manufacturing)
Business system costs -- reducing unnecessary non-product costs, unrelated to mid-market offering, that have been built into business system over time (complexity driven, corporate overhead, etc.)
Leveraging low cost factor potential in emerging markets, avoiding cost creep driven by mindset from developed markets
Organization -- mid-market products and business models at odds with established corporate practices and bases of power
Typical Challenges
Brand positioning -- move up-market to boost image
Offense -- challenge MNCs at the lower end of MNC product range, and eventually migrate upwards on product/price pyramid
Pursuit of global middle market customers in emerging AND developed markets
Growth -- Tap into larger volume of customers than high end positioning allows
Defense -- innovate in mid-market before MNC/Chinese competitors do
Selectively, leverage China mid-market to sell to other emerging and developed markets
Motivation for Middle
Market Push
Typical starting point
Mid to lower end products
Emerging brands, concentrated in China, often with some sales in other emerging markets
Chinese Companies in China
High end products
Established brands and strong market positions in developed markets world-wide
Foreign Companies In China
Pursuit of the Middle Market
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22 Competing in the China Truck Market
While the size and importance of the
Chinese mid-market opportunity may be
understood, it is often unclear how
Multinationals can participate in the
market. The Chinese market is already
highly fragmented, and the pathway to
entry for foreign players is not obvious.
However, we believe that several market
entry options exist, as noted in Exhibit 15.
In all cases, it is important to understand
that competing in Chinas rapidly
expanding and highly competitive mid-
market will require an integrated set of
capabilities.
Exhibit 14
Increasing Business Evolution in China and Beyond
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23 Competing in the China Truck Market
For example, MAN SE (Maschinenfabrik
Augsburg-Nürnberg), in a joint venture
with China’s Sinotruk, has maintained a
two-tiered strategy since early 2011.
Vehicles for the Chinese market are sold
under the Shandeka brand name, and
those for other emerging markets across
Asia, Africa, and the Middle East are sold
as Sitrak. This strategy allows MAN to
sell two different vehicles at two different
price points to two different markets, with
separate business models.
In China’s passenger vehicle market,
similar two-tiered strategies are
increasingly adopted by international
OEMs in the form of Joint Venture local
brand development. Starting with the
Everus brand launch by Guangzhou
Exhibit 15
China Truck Market Entry Model Options
Honda in 2010, Shanghai GM Wuling,
Dongfeng Nissan, and Dongfeng Honda
have each launched their respective JV
local brands. The vehicles carrying those
brands are often originally branded
vehicles at the end of their life cycle,
which are rebranded after certain local
adaptations are made to meet the taste of
the Chinese consumer. Such an
approach is intended to generate higher
volume through upgraded old generation
vehicles without diluting the brand image
of international players.
The two-tiered strategy, with separate but
parallel business models, can be
effective: it enables companies to
compete in mid-markets where they
otherwise could not. However, it is not a
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24 Competing in the China Truck Market
trivial task for many global producers of
industrial equipment to build the
capabilities needed to sell effectively to
mid-market customers in China. They
must invest in Chinese (or equivalent)
R&D and product development,
simultaneously integrating their new
operations with their old and managing
intellectual property challenges. They
also lack the home advantages that
Chinese mid-market innovators possess:
the knowledge of their market niche,
access to low-cost production resources,
and a deep understanding of the
regulatory and operational environment.
Joint ventures such as MAN’s can help,
but they also add complexity.
A small number of global companies are
focusing on developing an integrated
capabilities system that approaches
Chinese mid-market customers and
Western higher-end customers in an
integrated way. This requires a relentless
focus on improving operations and
product development together with
regional integration. For example, a
company might migrate more parts of its
value chain and innovation practices to
China and other lower-cost countries —
with the intent not of saving labor costs,
but of gaining distinctive production and
sourcing capabilities that can be put in
place around the world. These new
efforts can specifically target the
country’s mid-market and use local
engineers and research staff accustomed
to more frugal ways of thinking. It may
not be obvious at first how particular
product lines will be affected, but the new
efforts can act as springboards for the
kinds of ventures that lead to capabilities
that can be leveraged around the world4).
4) Edward Tse, John Jullens and Bill Russo, “China’s Mid Market Innovators”, Strategy & Business, Summer 2012, Issue 67.
Conclusions
We are in the midst of an economic
revolution: a shift of the global center of
gravity of economic strength towards the
east, which is fundamentally reshaping
the competitive landscape of numerous
industries. As an economic bellwether,
the automotive industry is of great
importance to this rebalancing of
economic power. The changes that
result from the restructuring underway in
the automotive sector are fundamental
and irreversible.
After an unprecedented period of
economic expansion, the Chinese
government began taking measures to
shift the economy to a more stable and
sustainable pattern going forward. China
is likely to manage the risks associated
with this transition with little disruption to
the world, the environment, and the fabric
of its own society.
By 2020, we anticipate that the
commercial HD/MD trucks install base
will increase by almost 7 million units to
10.7 million and annual sales will rise to
1.7 million – representing 43% of the
global truck market. With anticipated
growth in export sales of Chinese-
assembled trucks, it is easy to see how
the Chinese market will be the most
important market in the world.
It is becoming increasingly urgent for
global truck manufacturers to get in the
game in China. The local players will
increasingly influence regulatory policies
and standards, making it more difficult to
enter and compete in the market in the
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25 Competing in the China Truck Market
future. The delay of Euro 4 gives local
MDV/HDV manufactures more time to
develop their technology, as they retain
their enormous cost-advantage compared
to European and Japanese high-end
OEMs.
While it is legitimate to question whether
Chinese companies can assume a
leadership role in the transformation of
the global commercial truck industry, one
simply cannot deny the influence that
China has had on industry developments.
The sheer size and growth of the China
market will require multinationals to
consider reprioritization of their capital
plans and resource allocation. The
reallocation of production and supply
resources to China has fundamentally
changed the cost structure of many
industries – which changes the entire
competitive pricing game. China’s
government policies and centrally
planned economy have supported the
creation of the infrastructure needed to
stimulate both the supply and demand
side of the auto business.
Already, low-cost “good-enough” quality
Chinese companies are about to change
the global competitive landscape with
products that are relevant to the high-
growth global emerging markets. As
China automotive players begin to
consolidate, they will increase their
efficiency, scale and R&D capabilities –
making them even more competitive in
the future.
Global manufacturers will increasingly be
pushed into the luxury “niche”, unless
they adjust their business model and
develop low-price, as opposed to low-cost
products, which are not just “good
enough”, but have the right features,
durability, more rapid innovation, and
lower price to be sold globally. The
Chinese market is already highly
fragmented, and the pathway to entry for
foreign players is not obvious. However,
we believe that several market entry
options exist as previously noted. MAN’s
JV with Sinotruk may be able to crack
open the mid-range market in which local
OEMs are dominant.
A catalyst is defined as “a person or thing
that precipitates an event”. This is an
appropriate characterization of China’s
role in the transformation of the global
auto industry. In a globalized world, we
will likely find that the transformation of
the automotive business model may not
be linked to any one company or country.
Instead, leading 21st century companies
will be the ones that can quickly adapt to
the reality of globalization.
The emergence of China as the largest
automobile market in the world is a
significant event only in the sense that it
causes the entire world to take notice of
just how fast this economy is developing
– and to also understand precisely how
China is transforming the global auto
industry. Rather than trying in vain to
turn the clock back to the way things
used to be, it would be wise to learn how
to use these transformational forces to
define a business model to leverage the
capabilities which globalization makes
possible.
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26 Competing in the China Truck Market
Appendix
China’s truck classification is different
from what is employed in other markets.
Exhibit16 compares China’s classification
scheme with that of the US market.
Exhibit 16
China vs. US Truck Truck Classification
About the Authors
Edward Tse is founder and CEO of Gao Feng
Advisory Company. He built and ran the Greater
China operations of two leading international
management consulting firms for a period of 20
years. He has consulted to hundreds of
companies – both headquartered in and outside
of China – on all critical aspects of business in
China and China for the world. He also
consulted to the Chinese government on
regional strategies, state-owned enterprise
reform and Chinese companies going overseas.
He is the author of over 100 articles and three
books including the award-winning The China
Strategy. He is working on his fourth book.
Bill Russo is the Managing Director and
Automotive Practice leader at Gao Feng
Advisory Company. His 30 years of experience
includes 15 years as an automotive executive,
including 10 years of experience in China and
Asia. Mr. Russo has worked with numerous
multi-national and local Chinese firms in the
formulation and implementation of their global
market and product strategies. While the Vice
President of Chrysler North East Asia, Mr.
Russo successfully negotiated agreements with
partners and obtained required approvals from
the China government to bring 6 new vehicle
programs to the market in a 3-year period, while
concurrently establishing an infrastructure for
local sourcing and sales distribution. Mr. Russo
is a highly sought after opinion leader on the
development of the China automotive industry.
Gao Feng Advisory Company (www.gaofengadv.com) is a pre-eminent strategy and management consulting firm with roots in China coupled with global vision, capabilities, and a broad resources network. We help our clients address and solve their toughest business and management issues -- issues that arise in the current fast-changing, complicated and ambiguous operating environment. We commit to putting our clients’ interest first and foremost. We are objective and we view our client engagements as long-term relationships rather than one-off projects. We not only help our clients “formulate” the solutions but also assist in implementation, often hand-in-hand. We believe in teaming and working together to add value and contribute to problem solving for our clients, from the most junior to the most senior. Our senior team is made up of seasoned consultants previously at leading management consulting firms and/or ex-top executives at large corporations. We believe this combination of management theory and operational experience would deliver the most benefit to our clients. Our name Gao Feng is taken from the Song Dynasty Chinese proverb Gao Feng Liang Jie. Gao Feng denotes noble character while Liang Jie refers to a sharp sense of integrity. We believe that this principle lies at the core of management consulting – a truly trustworthy partner who will help clients tackle their toughest issues.